Session on “My first decade as a full-time value investor”: Key learnings by Mr. Jatin Khemani, CFA

Contributed By: Dr. Udai Cheema

Recently, CFA Society India had invited Jatin Khemani, CFA, Founder & CEO of Stalwart Advisors to speak about his experience of being a full-time investor over the last 10 years. The session held at the Holiday Inn, New Delhi was full of insights from a young man who has become a trusted name in the Indian Investing landscape. He has also given us a wonderful platform for learning in the form of

Interestingly, Jatin designed his talk based on a twitter thread that he had published a while back regarding his learnings after going through his first ten-year market cycle as a full-time investor. He took each of the tweets from that thread and elaborated upon it. We are going to follow the same layout for our post. Here are some of the highlights from his talk.

Tweet 1):“In the beginning, everybody thinks bottom-up stock picking is the holy grail, I thought so too. Whereas, in reality, sectoral tailwinds/headwinds immensely matter and should never be ignored.”

  • When there are headwinds, the aircraft burns more fuel and still reaches its destination late. A pilot can’t really do much in such an environment. Similarly, there is only so much growth a company can manage if the external environment is hostile.
  • The example of Jeff Bezos and is a good one when it comes to riding the tailwinds. The internet usage was increasing at 2300% a year and Bezos was the right man at the right time with the right product to ride the wave.
  • Investors should try to identify sectors that enjoy such massive tailwinds. Even with decent management, the sectoral tailwinds will make sure that the company does well. Also while looking at the past performance of a company, try to figure out whether the superior performance has been due to sectoral tailwinds or management competence.
  • Some sectors that are currently enjoying tailwinds and could have the longevity of growth include;
    • Asset management industry
    • Life and Health Insurance
    • Staffing companies
  • Some sectors that are currently facing headwinds include;
      • Traditional Media
      • Automobiles
      • Highly regulated/Govt. related sectors


Tweet 2)“I always thought technical analysis is all gas and what matters is ‘just’ the business behind the stock. I was wrong. Price-action, volumes, delivery data, liquidity/flows, index inclusion, etc. also matter & can add value even for fundamental/value investors especially for timing and optimising entry/exit better”

  • In today’s world, more than half of the flows are decided by algorithms and the majority of the flows are passive via ETFs. These flows have no human intervention and run on certain guidelines. This can lead to massive inefficiencies and bubbles. You can either sit out such bubbles or can participate in them only if you understand what is driving them.
  • If you have invested in a stock based on fundamentals and the price has gone ahead of the fundamentals, it might be a sell but the stock might be destined to enter a major index in the short term which could further boost the valuations and make the stock even more expensive then based on this information one can ride the momentum and time the exit better based on technicals.


Tweet 3)– “Value stocks without a catalyst are value traps. It’s okay to wait for the catalyst and board the train 20-30% higher, but at least it will be a moving train and not a stationary one with an indefinite wait, capital is finite and opportunity cost should always be considered”

  • There are about 4000 listed stocks, out of which 1700 are actively traded with more than 100cr market cap. 75% of these actively traded companies are value traps. For example, holding companies have always traded at a massive discount to intrinsic value and historical data suggests that these companies have always traded at such discounts. Stocks trading below cash, trading below book value/replacement cost, conglomerates – all such companies are value traps if there is no trigger in sight otherwise the wait could be endless and most investors would run out of patience. Conglomerates need a demerger to unlock value or else they will always appear to be cheap based on the SOTP valuation method.
  • Without a trigger, having a lot of such stocks in the portfolio will kill the CAGR. The opportunity cost in such cases can be huge.

Tweet 4)“It probably makes sense to have a stop-loss in terms of time, not every management can execute. In fact, even if the past execution track record is great, it could falter in an evolving environment, changing competitive dynamics, regulations, etc. If our thesis doesn’t play out for 3-4 years, something is wrong and it makes sense to switch but continue tracking “

  • Investors should consider a ‘time-based’ stop-loss on their investments. Even Ben Graham has suggested in his book Security Analysis that if the thesis doesn’t play out in two odd years then he would exit the stock. So, there should be a pre-defined time that one has to give his investment to work out in his favor. Exit, track the stock and if you see the thesis finally playing out, there is no harm in buying the stock 20% higher.
  • Management teams that are able to execute and that are able to show consistently profitable growth command the highest premium. So one needs to find out and exit the companies in the portfolio that are not able to do that and 3-4 years is a good time frame to make that judgment.


Tweet 5)” In small & micro caps, entry during a bull market is easy & smooth, however, there is no exit in a bear market as volumes dry up or exit has to be at a huge impact cost. This is like Abhimanyu’s Chakravyuh.”

  • When we talk about multi-baggers, we are discussing companies with a few hundred crore market cap or even less that have the potential to become big over the years. They can practically grow by 10-20-30x, whether they are able to or not remains to be seen. Besides the potential upside, the process of unearthing a hidden treasure can be quite intellectually stimulating. Small size, negligible institutional ownership, minimal analyst coverage of the company are a few reasons why such companies turn out to become multi-baggers as they keep delivering and then eventually the institutions start to take notice.
  • All isn’t as rosy as it seems. Small and Micro-caps have a significant downside as well compared to some of the bigger and more well-known names. These companies possess a huge concentration risk in terms of their product portfolio, number of clients, geographical concentration of operations. All these factors add fragility to a small scale business model. For example,  all these risks are evident in the way cement companies across various production capacities are valued by the market. Larger and well-diversified players get a much higher premium compared to more regional players with small capacities with 1-2 plants.
  • Lack of scale and experience can put such companies in a spot of bother when the going gets tough in the company itself or the economy as a whole. Keyman risk is also a concern in such companies. Their inability to keep up with regulations can put the business at risk as well.


Tweet 6)“In cyclicals, exit criteria should be defined at the time of entry itself and should be adhered to, no matter how rosy the fundamental performance in the upcycle is. A timely exit is all that matters. Otherwise, you would be back to square one. While exit strategy should be triggered based on some fundamental criteria like a reversion to mean in valuation/profitability margins, however, the actual exit could be on the way down, maybe 10-15% from the top.”

  • All industries are more or less cyclical. Some being more cyclical than the others, these can be divided into 3 buckets;
    • Low Cyclicality – FMCG, IT and any other consumer-facing businesses.
    • Medium Cyclicality – Industrial goods. Consumable items such as refractories, bearings, abrasives, etc.
    • High Cyclicality – Industries with 2-4 years of high growth and 3-5 years of de-growth. These include the auto industry, lending businesses (NPA cycles invariably put them through years of degrowth), capital goods which are highly linked to the shape of the economy, commodities such as graphite electrodes.
  • Criteria that can trigger a buy in cyclicals include company selling below cost, the entire industry is bleeding, the survival of majority players at stake, weak/leveraged players on the brink of bankruptcy, old capacities going out of the system and new capacities are not coming up and one expects that demand-supply will get restored going ahead and profitability will come back going ahead. The time to enter such businesses is when the P&L of the company makes you feel sick. The traditional valuation metrics might not work here as the business might be losing money. Some important metrics while valuing such businesses can be price/sales, replacement cost, price/book.
  • It’s important to book the gains in cyclical stocks before the stock price is back to square one. When the cycle is in an uptrend the earnings go up and markets tend to re-rate the company and de-rating of PE occurs in the downcycle. The exit can be triggered by reversion to mean valuations or reversion in operating margins. When the company hit the mean valuations/margins of previous good times in the industry, one should start planning their exit. One can never predict how far the exuberance can take the stock, so a more prudent way would be to ride the momentum and sell it 10-20% from the top. Peak multiples along with peak margins is a strong signal to exit a company operating in a cyclical industry.


Tweet 7) – Certain investing styles are best suited for individual investing & not for managing/advising public money. The role of money manager isn’t maximizing returns but optimizing them with respect to risks. Drawdowns should be minimized even at the cost of sacrificing some returns. Drawdowns that last long enough could be considered permanent loss of capital.”

  • Certain investing styles like deep cyclicals, deep value, turnarounds can really test the patience of investors. They can take much longer to perform while in the meantime, they can show a 50-60% drawdown in the portfolio before eventually going up 4-5x. As an individual investor, one might be able to handle the volatility based on personal conviction but as an advisor, at times it can get difficult to convince some of the clients to hang in there until the story plays out.
  • Some clients tend to misconstrue drawdowns and volatility as risk rather than opportunity and therein lies the problem. The impatient ones exit at just the wrong time when they should be buying instead. The underlying problem is that when someone is not interacting with the markets on a daily basis and invests on borrowed conviction then a 50% drawdown in the portfolio can be scary, he thinks it might go to zero if the company turns out to be one of the rotten apples as we have seen with certain companies in the recent times with all the corporate governance issues. Even if the stock goes up 5 times, later on, the investor would have sold out early at a loss, thereby,  losing confidence in his advisor.
  • The focus should be on minimizing drawdowns even if it is at the cost of sacrificing some percentage points on the returns. For example, in the advisory business, a 25% CAGR with a 25% drawdown is worse than an 18% CAGR with a 10% drawdown. So when you are advising the public at large, a lower return with much lower volatility/drawdowns is a much better option. Consistency of returns is more comforting for the clients than a rollercoaster ride. Even though massive wealth is created in small undiscovered names/cyclicals compared to the large efficiently priced companies but this is a trade-off that one has to make as an advisor.


Tweet 8)- “If there is froth in a particular segment of the mkt, even if your stocks from that segment are at a reasonable valuation they will still get affected badly when there is a sell-off in that segment.”

  • Small and Midcap space, in general, was quite richly valued in 2017 but some of us must have thought that our stocks which haven’t participated in the rally would stay isolated from any significant drawdowns if the market as a whole corrects. Ironically, that was not the case. Even fairly valued, good debt-free companies bore the brunt of the subsequent meltdown in the Small and Midcap segment.
  • The learning has been that the index valuations of the space in which your portfolio fits must be tracked. It makes sense to switch to some cash/other less richly valued segments of the market/defensive names in times of over-exuberance.

Tweet 9)“Diversification is crucial no matter how deep your understanding of the business is, coz shit happen”

  • Even though we have some great examples of people who concentrated and made it big but for one such hero there are thousands of zeros but you never hear about them as nobody writes books on them.
  • It’s extremely difficult to come out of the financial and emotional turmoil when that one/two concentrated position in the portfolio starts to go against you. Even if we were able to diligently exclude all companies with doubtful financials/management, there can be good companies that can fall into hard times due to XYZ reasons that nobody could have predicted at the time.
  • The sweet spot could be anywhere between 15-25 positions with allocations ranging anywhere between 3% to 10%. Sectoral and geographical caps of 25% can also be applied to the overall portfolio as part of risk management.

Tweet 10)” While formal education like CA/CFA/MBA can set the foundation right, there is no substitute for own experience; it is the biggest teacher in the market. Vicarious learning is also not enough, one has to be invested in the market to go through those emotions. It takes one or two market cycles just to understand own psychology, mass psychology and to determine ‘what works for me’.”

  • Investing is like swimming, no matter how much you read about it or watch tutorials, until and unless you take the plunge, almost drown – you won’t learn how to swim or protect yourself from drowning.
  • There are plenty of ways to make money in the market. Each style requires a particular skill set, psychology, and temperament. One has to figure this out by themselves as to what works for them. There is no single right way. Knowing yourself and figuring out which investment style suits you is the most crucial aspect of successful investing. Feedback loops are longer especially for investors compared to traders. So, it might take some time to figure out what works for you but you must keep at it.
  • Charlie Munger says;
    • “You dont have to pee on an electric fence to learn not to do it”

Unfortunately, in real life, we need to get some electric shocks to learn and evolve as an investor.

In conclusion;

When someone decides to share their decadal experience with you, it’s always a pleasure especially when it’s someone like Jatin Khemani. Here’s hoping that Jatin will deliver a similar bi-decadal presentation in 2030. A day packed with learning and great hospitality by the team of CFA Society India. Looking forward to the future events by the Society, till then keep learning, keep evolving and happy investing to you all!

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Session on “Budget 2020 and Its Impact on Equity Markets” by Mr. Jaideep Merchant

Contributed By: Ria Agarwal


On 8th February 2020, the Pune Chapter of the CFA India Society held a session wherein Mr. Jaideep Merchant, Fund Manager, Janak Merchant Securities Private Limited gave a presentation on ‘Budget 2020 and Its Impact on Equity Markets’. He provided insights on topic while focusing on four crucial areas:

  • Impact on government bond market

India has understandably been cautious in the past by capping the FPI’s (Foreign Portfolio Investors) investment in its debt market, but this budget proposes to open the bond markets for FPIs. This year the government is allowing certain government bonds to be issued without any limits to non-residents. This move is intended to help specific Indian government bonds to be included in global bond indices. Exchange Trade Funds (ETFs) that invest in sovereign bonds are large pools of capital that did not have access to Indian markets due to limits in place.In the long run this can help relieve the pressure on the local bond market along with decreasing the current account deficit of the country.We can monitor the progress by:

  1. Timeline of inclusion
  2. Size of bond issuance
  3. Liquidity in those bonds
  4. Tenure of bonds
  5. Volatility over the cycle especially when there are outflows

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  • Dividend Distribution Tax Abolishment

The abolishment of the DDT was an attempt to increase FDI in the manufacturing sector. The impact of the same could be in various forms:

  1. The MNCs operating in India could increase the dividend pay-out ratio going forward. The MNC parents were unable to set off the dividend tax paid by their subsidiaries on dividend repatriated by them to their home country.
  2. A lower DDT should make it more attractive to move manufacturing plants to India. Combine this with the lower corporate tax rate of 15% for new manufacturing companies announced last year there is higher probability that MNCs will move more production to India.
  3. Domestic companies’ behaviour towards compensation and dividend completely depends on the promoter’s behaviour. There is a large possibility for large buyback of shares in place of giving dividends. This measure is a negative for the domestic investor as now dividends are tax in their hands at the slab rates
  4. Equity mutual fund investors should evaluate moving to growth option and use systematic withdrawal plan for managing their cash flows


  • Disinvestment

The government has an ambitious divestment target of Rupees 2.1 lac Crore. This was a major announcement of the 2020 budget. This includes strategic divestment in Air India, Concor and BPCL among others. Jaideep says, the budget deficit target hinges on strategic disinvestment. We can consider this as a good opportunity to look at the CPSE ETF. Due to the decreasing stake of the government in the PSUs we should keep an eye on the companies entering and exiting the CPSE ETF as any company stock that has reached 51% government holding, will be removed from the index. This will result in an increase for the supply of stock and the government kept stocks reduces. It may bring opportunities that arise when promoters are forced to sell their equity shares in the market due to regulatory or financial reasons and those stocks are available at distressed prices during that time.  Many of these companies’ trade at very low valuations and have good prospects. The PSU index could be wider apart from the benchmark and the dividend yields could also be higher.

  • Tax collections assumptions and Tax collection at source (TCS)
  1. Mr Jaideep Merchant says that if the states focus more on GST enforcement, it is likely that collections should be much better in FY 2021.
  2. The 5% TCS announced on LRS will help increase the transparency of transactions for the government and a few other key changes made are that TCS of 0.1% should be collected by seller if the turnover is above 10 crore rupees per year.
  3. 1% tax on sale of goods if sold on e-commerce platforms will be collected by the platforms and paid on behalf of the vendors.

The above listed points are only a few aspects of the budget that were mentioned by the speaker. Overall Mr Merchant provided practical insights into the budget.

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In Conversation With Ms. Jyoti Bisbey, UNESCAP

Interviewed By: Deivanai Arunachalam

Jyoti bio photo January 2020

GDP growth has often been overemphasized as an indicator of a nation’s economic well-being.  Quite like sizing-up an individual by how much he makes, merely in terms of money. The obsession for materialistic success blinds many. Governments and nations are no exception – after all, aren’t governments themselves composed of apparently successful individuals?

Over the last few decades many developing countries have witnessed impressive rates of economic growth. Thousands have been lifted out of extreme poverty.  We live longer and better lives. Globalisation has helped us savour the best of the west and the bells of economic growth ring loud and clear. Yet, how many of us are truly satisfied and happy? More countries are moving towards a more wholistic sustainable living by including people’s happiness and planet’s health in the equation like Bhutan and New Zealand.  While we usually think governments need to take action, what about businesses?  What can they do?

The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) attempts to answer these uneasy questions in its upcoming annual 2020 Survey.

The United Nations adopted the Sustainable Development Goals (SDGs) in 2015 – a blueprint to realize a better future for everyone. The UN emphasizes the need to achieve these interconnected goals related to poverty, inequality, climate change, peace and justice, by 2030.

We spoke to Jyoti Bisbey, Lead Development Finance and Economics Specialist at the United Nations ESCAP on an external assignment from the World Bank. Her research suggests how sustainability can be mainstreamed into businesses’ financing and investments decisions by adopting the Environmental, Social and Governance (ESG) framework.

What is ESG? Which ESG elements are examined before making an investment decision?

Jyoti:  ESG stands for Environment, Social, Governance factors, which when combined constitute sustainability. Today investment managers negatively screen companies based on ESG criteria, by excluding assets which are not ‘green’. This is only the beginning. As the market moves towards a better understanding of sustainability, asset managers should actively pursue and select only sustainable investments. This means moving from exclusion-based investment to inclusion-based portfolio management. As more investors and regulators seek information on ESG factors, fund managers are increasing transparency and disclosing fund activities. But we have a long way to go.

How is ESG going to help companies become sustainable?

Jyoti: Currently, the primary focus is on the ‘E’ of ESG.  This is because there is more information and normalization of data available to measure and track activities which directly impact the environment. These are called ‘Scope 1 and 2’ level emissions according to the Greenhouse Gas  (GHG) Protocol.  However, even these are underestimated as the true cost of carbon is not included in the production process. Any measure of profit (broadly defined as revenues minus costs) is dependent on the estimate of costs. We do not know the true cost of many of our natural resources because we do not price the externalities. Carbon is an externality. Lately companies like Mahindra & Mahindra ($10 per metric ton of CO2 emissions) and Infosys ($10.50 per metric ton of CO2 emissions) have come up with an internal carbon pricing.  Carbon pricing is the best way to reduce companies’ carbon footprint and report on GHG emissions for the “E” in ESG.

Here’s another example. Water is a commodity and it isn’t free. Water is under-priced globally.  Do we know the true cost of water? When we don’t, how do we incorporate its cost, say in the production of cotton? A cotton shirt is inappropriately priced too low, given the volume of water it takes to produce a shirt. We buy indiscriminately, based on flawed pricing, and leave substantial carbon footprints. Since we do not know the costs, how do we move to a sustainable profit model? These externalities like carbon, water and even land are not priced correctly. So we do not know the true cost of production.

What are the next steps in encouraging investment within the ESG framework?

Jyoti: Let’s take a coffee company for example and look at the entire value chain. Investors should be provided with information on whether wastewater was disposed correctly. On whether good labour practices are prevalent at the plantation. This way, the process of the value chain – from farming coffee beans, till the end consumer who purchases her morning coffee can be scrutinized. We need to implement reporting and disclosure standards that facilitate release of such detailed information along with an agreed set of standards for ESG.

There are several global financial initiatives such as the UN Principles for Responsible Investment (UNPRI), IFC’s Sustainable Banking Network (SBN), Global Sustainable Investment Alliance (GSIA) etc. Investors and companies often wonder which model to follow. India’s financial regulators –RBI and SEBI can adopt and endorse financial regulation on ESG and establish protocols for sustainability reporting. The regulator must define which standard will fit each of the three ESG categories.

Once a standardized regulation is established domestically, the ESG practices should be harmonized across countries so Indian businesses have a common framework.

What can the CFA Society do?

Jyoti: It is heartening to note that the CFA Institute has incorporated ESG in its curriculum.  CFA Society and members can help in three ways: First, think about how our financial system can adopt climate risks in financial reporting and disclosures. Second, what kind of analytical tools can be developed to support companies, especially the small and medium enterprises in understanding pricing of externalities? Third, CFA institute members who head investment companies must include ‘purpose’ in the traditional profitability model, transitioning from a model based on profit maximization model to one based on purpose maximization. This requires moving from a shareholder to a stakeholder approach, where a company operates on ‘do no harm to the people and planet’ basis.

About Jyoti Bisbey

Jyoti Bisbey is the Lead Infrastructure Economics and Finance Officer in the Macroeconomic Policy and Finance for Development Unit in the United Nations’ Asia HQ at Bangkok, Thailand. Currently on an external assignment to the UN from the World Bank Group (WBG).  Jyoti is leading the dialogue on SDG 2030 Agenda economics and financing issues for the Asia-Pacific region. At present, she is authoring the theme chapter of the flagship report– Economic Development Survey for 2020 on ‘Economics of Sustainability’.  She has also co-authored many blogs, an Infrastructure Financing book, available at UN ESCAP’s website and presented on topics such as SDGs and ESGs.

Jyoti specializes in Infrastructure Finance with an MBA from George Washington University and Mathematics in undergraduate from St. Stephens College in Delhi. Beyond work she enjoys spending time with her family and running.



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Session on Due Diligence for Investments in Artificial Intelligence by Mr. Kashyap Kompella, CFA

Contributed By :Sri Siva Shankar R., CFA


This was second event of the day conducted by the Bangalore chapter of CFA Society India on 22nd February, on Due Diligence for investments in Artificial Intelligence by Mr. Kashyap Kompella who is the CEO and Chief Analyst at RPA2AI Research. He has evaluated over 200 vendors for their technology and shared his learning with us.

The session started out with Mr Kashyap giving us a brief introduction on AI/ML and what are the different types of Artificial Intelligence and Machine learning process and what the VC/M&A investors look for in these start-ups. The investments made in this sector alone have touched $27 billion in the 2019.

The primary issue with evaluating AI start-up is the metrics one should evaluate, is not clearly defined like SaaS start-ups due to the nascent nature of the industry. Kashyap also quoted that “Software is eating the world, Machine Learning is eating software”.


First part of the due diligence an investor should explore is the competitive advantage or the moat. Investors should evaluate if AI/ML start-up has ownership of the model and the data. Next would be to have a team that understands the maths and science behind the model. This helps the firm to re-orient and modify their code when a new technology or model penetrates the market.

The second part of the due diligence is evaluating the performance and the readiness of these models. There are number of open source model available which are used as industry benchmark. The model that is being evaluated should be tested against these industry benchmark to evaluate the value they provide. They should further be tested on their readiness and scalability.

This was followed by a Q&A where the audience were keen to understand the unique risk that comes with AI start-ups. Mr. Kashyap pointed out the case with image recognition apps and the need to regulate the use of these AI models to prevent abuse. Till such proper laws are introduced, the risk is must be factored in. He also pointed the similar risk were found in e-pharmacy space and the successful start-ups found a way to worked around it and that is also the reason a sound management team is of absolute importance.

Kashyap also generously shared a number of online resources which could be tapped by any AI/ML enthusiast to develop skills and gain a greater understanding of this upcoming trend. He also spoke about how knowing code, maths and domain knowledge is a sought-after expertise in this industry for success.


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Session on Banking Analytics by Ms. Anna Michael, CFA

Contributed By :Sri Siva Shankar R., CFA


On 22nd February, the Bangalore chapter of CFA Society India hosted Ms. Anna Michael to conduct a session on Banking Analytics. Anna Michael is a CFA charter holder and the Head of Trade and Treasury Solutions Analytics in Citi. She has over 20+ years’ experience in banking and has taken up roles in Institutional Banking, Consumer Banking and Investment Banking.

Anna started the session with an introduction to the importance of visualizing a data set and explaining the tools and techniques used to visualize a data set viz. dashboards, Tableau, Qlikview, PowerBI. These data sets can help us to understand consumer behaviour. Harnessing the power of data science, prescription analytics can be employed to understand which RMs are more effective than others for instance, or predictive analytics could be used to forecast cash flow for a customer. Recommendation systems can help us understand what to recommend to a customer, when to recommend and whom to recommend a product to.


In the last decade, the volume of data and the velocity at which it comes to companies has been only growing. Also, computational power and the network bandwidth available to process this data has grown exponentially. With the advent of open banking, not using these new age technologies could potentially lead to loss in revenue.

Banks have a fiduciary responsibility to protect their client’s data. This acts a primary constraint for the banks when they try to employ new age technologies. They constantly work on solutions like setting up control systems to ensure there is no breach when using a third-party technology or replicate the algorithms in-house to remove threats and stay competitive. While this does take significant time and effort, the banks have now realized the power data holds. Anna rightly quoted that earlier, “Rivers defined where cities are, then money defined where cities are, (but) today, money is where data is”.

Anna then walked us through the life cycle of a data science project explaining the steps taken from conceptualizing the business requirement to deployment, and the roles people take on in a data science project. This was followed by an intense Q&A session by the audience. Questions ranged across how regulatory challenges is an integral part of the banking process, how it makes sense for traditional banks to collaborate with startups, and what new skillsets in Data Science CFAs need to develop to upgrade themselves on a continual basis.


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Market Outlook- March 2020

Contributed By : Navneet Munot, CFA , CIO, SBI Funds Management Pvt Ltd and Chairman, CFA Society India


Market Outlook
Coronavirus dominated headlines through the month and global risk assets sold off sharply as the spread of the disease outside China led to fears that disruption for the global economy could be more severe than earlier estimated. The long-dated US bond yields have plunged to record lows consequently. The 30-year US treasury yield at 1.67% now is almost 100 bps lower than the level touched in December 2008!! Financial markets globally had so far been helped by concerted monetary accommodation from central banks even as the economy had yet to show signs of meaningful pickup. The Coronavirus shock perhaps just acted as a trigger for a market anyway waiting for correction. While it is too early to estimate the exact impact, it is very likely that policy action will have to stay very growth supportive. Yet growth continuing to struggle even with all the monetary accommodation only suggests that monetary policy has hit its limits. This only reaffirms our belief that fiscal policy will have to play a major role going forward to take the global economy out of this prolonged slump.

Looking beyond the short-term, this episode may just add to the list of reasons for the rest of the world to reduce over-reliance on China. While there has been truce of sorts between US and China of late, it is highly unlikely that the trade wars and tech wars will deescalate meaningfully. Moreover, demographics will continue to deteriorate for China and put pressure on the availability and cost of labour. This implies that global supply chains will have to readjust, and manufacturing should shift away from China to other countries. While India isn’t the only choice, and there are strong contenders in Vietnam, Thailand and Bangladesh amongst others, India should fancy its chances as an alternative to China given the many unique advantages it has. In that context, US President Trump’s recent visit to India holds immense symbolic value even as nothing concrete may have come out of it immediately.

Size works in India’s favour. India provides a large supply of cheap labour and is a big local market at the same time. Yet we can’t just count on size and demographics as panacea to all our problems. Countries that do well tend to have three things in common first, a strong institutional framework that deals with sanctity of contracts, dispute resolution, enforcement of law and the likes. Second, strong focus on innovation and education, and third, a robust social security net. Of these, we are making significant progress on the third point but need to do a lot more on the first two.

A lot of financial resources are needed for continued social welfare spends which will have to be garnered through focus on the first two points. We need to keep pushing the envelope lest we fall in the middle-income trap. We need to ensure that we have adequate institutional capacity, on judicial, administrative or regulatory fronts, to match our growth ambitions. The developments around GST, IBC, the significant improvement in ease of doing business, etc are in the right direction but we need to do a lot more on execution and dispute resolution. The troubles of the telecom sector, with Vodafone Idea still struggling for survival, are far from over as remains the case with stressed NBFCs too. We need speedy and decisive resolution to these issues to revive confidence amongst foreign investors on our institutional capacity.

We also need to up our game on innovation and education. Not just is our R&D expenditure meagre at 0.6%-0.7% of GDP, we also need more coordination between business, academia and government agencies on research. As the quest for global supremacy leads to a race to indigenize technology, particularly between the US and China, the world could be staring at this century’s ‘Sputnik’ moment. The pace of technological evolution and consequently disruption could increase manifolds. Action on climate change risk will potentially lead to more innovation too. It becomes imperative against this backdrop for India to keep pace. Following China’s example, we should incentivize Indian talent abroad to return to the country. Right education and skill development similarly are vital to reap the demographic dividend and assume even more significance in the wake of the ongoing tech revolution.

All this being said, we have indeed travelled quite a distance over the past few years in putting the right framework to build on. Post GFC, there was a prolonged period of persistent negative real rates, with the latter part of this period marked by excessive capacity creation, rampant lending by banks coupled with heightened policy
uncertainty. This lay the seeds of a macro-economic crisis which hit a climactic peak in 2013, with the trough on economic activity recorded that year too.

To correct this, we did an administrative, regulatory and judicial overreach, kept real rates high for too long, embarked on fiscal tightening, acted to clean up the economy all at the same time. We also undertook structural reforms such as GST and IBC during this period which had a bearing on near term growth. A related consequence was a slowdown in the real estate sector which in turn impacted growth through both job creation as well as wealth effect. And to top it all, all this coincided with global slowdown and severe technological disruptions. It is therefore no surprise that we landed in the situation we are in today. GDP growth data (Q3FY20 at 4.7%) and fiscal deficit numbers for the period Apr-Jan 20 (128.5% of budgeted for 2019-20) released yesterday point to an extremely challenging state of affair. Yet, we shouldn’t get overly pessimistic about the current slowdown. Just as the blind optimism on continued 10% GDP growth a decade ago proved unfounded, we believe the current pessimism may turn out to be excessive and misplaced too.

We have achieved macro stability with current account and fiscal deficits under control, rupee largely stable and foreign reserves comfortable and rising. Inflation expectations are down, and cost of capital has declined too as manifested in the continued decline in g-sec yields. Banking system has been repaired with NPA clean-up, PSU bank recapitalization and consolidation, and most importantly the IBC framework in place for stress resolution. There were pockets such as NBFCs where there was a bit of bubble creation but now that space is getting cleaned up too. Both availability and cost of capital should therefore improve. In addition, steps such as global bond index inclusion, full tax exemption to sovereign funds for infrastructure investments, etc should continue to attract foreign capital.

On the other side, reforms such as GST and corporate tax cuts, improvement in ease of doing business, and the formalization of the economy and financialization of savings should all help the supply side too. Similarly, we have also made significant strides on food production. Public sector units haven’t done well but with the government now intent on strategic divestment, they can turn value creators over time. The government’s focus on supply side reforms has allowed the RBI to be more accommodative to revive demand. Recent moves such as Operation Twist, sector specific relaxations for Real Estate and MSMEs, and long-term repo operations (LTROs) suggest the RBI has taken a leaf out of global central banks‘ book and is intent on doing ‘whatever it takes’ to revive the economy.

In the near term, in addition to the various policy measures for reviving growth, a pick-up in rural economy, aided by better acreage and rise in global food prices, should help too. Gold price rise will help with positive wealth effect as should financial markets even as real estate continues to be a dampener. While job creation and income growth through supply side measures will happen at its own pace, focussed approach on real estate and infrastructure is vital for near-term demand revival. A scrappage policy for the Automobile sector will likely be a big boost. More importantly, after the reforms of the past few years, we need to avoid any further disruptions or friction of any sort to ease the economy and businesses into adjusting to the new way of doing things. Issues such as in those in the telecom sector should be quickly resolved.

Overall, developments around the extent of spread of Coronavirus, and the economic disruption it causes will continue to keep financial markets volatile, both globally and in India. Yet eventually this could prove a blessing in disguise for India as the disease forces a quicker rethink on global supply chain reorientation in a bid to reduce over-reliance on China. India stands ready to benefit from this shift given the strong reforms of the past few years, provided we continue following up with policy certainty, adequate institutional capacity and right execution.

While the global situation is worrisome, we hope mankind to quarantine any differences and inertia and work together with a much bigger zeal to not only overcome the current challenge but also achieve the ambitious Health and well-being goals for 2030 as set out in UN SDG 3.

Amidst heightened volatility, words of wisdom from the sage of Omaha are pertinent for investors- Be fearful when others are greedy. Be greedy when others are fearful.

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Dimensions of Value Factor

Contributed By: Rajeeb Bharali , CFA and Rajnish Kumar, PhD


Benjamin Graham is considered as the “Father” of Value Investing and his book “The Intelligent Investor” is lauded as the most influential book ever written on value investing. A value investing strategy implies buying stocks whose intrinsic value is greater than its market price. In one of the most pioneering works, Basu (1977) empirically tested the concept of value investing by examining price-earnings (P/E) ratios as leading indicator of future investment performance. This was followed up with the seminal paper by Fama-French (1992) where they used book-to-price to represent the value factor and that laid out the path for a quantitative way to capture the value premium as has been exemplified in the following years, perhaps decades, in the asset management industry.

To a keen observer, this begs the reader to ask 3 questions: 1. Is the Price to Book the most effective way to capture the value premia? 2. Is it wise to apply a standard set of valuation multiples uniformly across sectors/industries? 3. Why did the world of finance ditch Basu’s Price to Earnings in favor of Fama-French’s Price to Book ratio as the apt measure of Value? This article is the first of a series of 3 short articles which will try and address the above questions in the sequence stated.

The Value Premia

Over the last 12 years, value factor has under-performed the broad market. Numerous reasons have been cited to explain this underperformance. A low rate environment and substantially long expansionary phase leading to outperformance of growths stocks over value has characterized the past decade. At the same time, questions have been raised on the adequacy of valuation parameters used in capturing the value premia, especially with regards to growing intangible assets. A comparative analysis of total returns of different style factors shows that value factor has consistently underperformed the rest.

Pic 1                            Source: MSCI

With changing dimension of industry, asset quality and performance of value factor, it is imperative that we examine the effectiveness of other price ratios in exploring other dimension of value factor. Academia as well as practitioners use different price ratios as a representation of value such as price-to-book, earnings yield, cash flow yield, dividend yield, price-to-sales, EV-to-EBITDA and different variants of which is either historical, forecasted or average value of fundamental variables in the price ratios. As stated earlier, price to book are dividend yield are the favourites, especially amongst quants trying to exploit the value premia. But can these 2 variables capture the value premia in its entirety. To ascertain this we set out to assess each valuation multiple in isolation and see its efficacy over time.

As a starting point, we consider MSCI USA Index as our base universe and consider data from June 1994 till May 2019. We collate the valuation data for each of the securities forming part of the universe across the mentioned time period. As part of the outlier treatment, we winsorize the data on both ends (remove top and bottom 2% of the universe by each metric). Using each valuation multiple, we then divide the data set into quintiles. For example, based on Price to Earnings multiple, we rank the universe of stocks in ascending order and quintile it so that the top quintile (Q1) contains the stocks with the lowest PE multiple (value) and the bottom quintile (Q5) has the highest PE multiple (growth) stocks. In order to generate the pure price to earnings return stream, we calculate the return spread between Q1 and Q5. Similar exercise was done for all the other valuation metrics under consideration – Price to Book (PB), Price to Sales (PS), Price to Cash Flow (PCF), Price to Dividend (1/DY) and EV to EBITDA (EV_EBITDA)

The cumulative returns of these hypothetical long short portfolios (by multiples) are shown below. As can be seen, there has been a wide and growing disparity between PE and PB (or DY). In fact, for the period considered, DY has been negative and PB being close to neutral. PE has outperformed all other metrics hands down. Also to note is the fact that each valuation multiple has led to different outcomes, although correlated to a large degree.


While the above chart implies dominance of PE multiple, it is also worthwhile exploring its performance on a risk adjusted basis. The below table shows the performance analytics of different valuation measures (Sharpe Ratio is calculated assuming risk free rate of 0%):

Table to use

Consistent with cumulative returns chart, Price to Earnings looks more attractive as compared to other valuation metrics. Price to Earnings also performs better on a risk adjusted basis as compared to MSCI USA Value.


While the academic literature gravitated towards a single measure of value, Price to Book, and was ably mimicked by practitioners (mostly quants), it is, by no means, a complete measure of value factor premium. Although, many still use a composite value scoring methodology, encompassing most of these valuation parameters, it raises questions on a blanket approach being adopted across sectors/industries. For example, Price to Book may be an excellent measure for Financials; it is of limited use in the Technology sector. Efficacy of either PB or DY also raises the fundamental question of whether it takes into account the earnings power of a firm. A stock may have a very attractive PB or DY multiple but if it has a low or even negative earnings (historical or forecasted), it is best to stay away from such stocks and avoid value traps.

In our next article, we will assess the sector specific valuation multiples. We will create a new composite value indicator which incorporates sector relevance and compare it with an equal weighted composite of all metrics applied uniformly across sectors. It is very important to accurately define factors which capture the essence of the premia in its true sense, in times of changing economic environment.

About the Authors-

Rajeeb Bharali, CFA

About Rajeeb Bharali, CFA:

Rajeeb is a seasoned investment professional with ~9 years of experience in the field of investment management. His primary area of work is into asset allocation/portfolio construction for Fund of Funds (FoF) and investment manager research and selection. Rajeeb holds a BS in Engineering from Birla Institute of Technology, Mesra, graduating in 2008 and is an active member of the CFA Institute as well as the CFA Society India.

Rajnish Kuma, PhD

About Rajnish Kumar, PhD

Rajnish Kumar has over 8 years of experience in factor research across equity and fixed income. His area of interest includes ESG, smart beta, portfolio construction and risk-return attribution analysis across different asset classes. He has publications in top tier journals. He holds PhD in Economics from Indira Gandhi Institute of Development Research, Mumbai.


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